Early warning system expects a significant increase

Inflation rate (white), I index (orange)

The I-Index is based on around 2.9 million newspaper articles. The progress over the past five years is shown here.

(Photo: dpa, Handelsblatt)

Berlin The European Central Bank (ECB) has initiated interest rate hikes to stop inflation. However, with a view to the I index, this will not be an easy task. Despite the announcement by those responsible at the ECB in recent weeks that they want to do everything they can to combat inflation, the early warning system of Handelsblatt and TU Dortmund is predicting that the situation will worsen.

The I index reached a value of 16 percent in June. This means that the topic of inflation played a role in more than every sixth published newspaper article. This means that it has risen by almost three percentage points compared to the previous month. A year ago, the index was still five percent.

The development is a clear sign that the recent slowdown in inflation in Germany is only a temporary phenomenon. The inflation rate was 7.6 percent in June, after 7.9 percent in May.

The I-Index also examines which themes are increasingly influencing inflation. In June, it became apparent that commodity prices were reported less than before. So far, inflation has been primarily driven by rising energy prices. The development in the I-Index now indicates that people are breaking away from this description of the problem.

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Instead, the cause of inflation is being sought elsewhere: currently primarily in monetary policy. 17 percent of the articles dealing with inflation dealt specifically with the central banks. This is a top value – by far. The record so far was 14 percent.

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For project manager Henrik Müller from the TU Dortmund, this makes it clear that the ECB needs to communicate better. “President Christine Lagarde should concentrate her public statements exclusively on fighting inflation and publicly back off on other distracting issues such as climate change,” says Müller. Otherwise, the ECB would lose valuable time to contain rising inflation expectations.

Inflation expectations are significantly influenced by the media

The I-Index feeds on detailed insights into consumer and business expectations and can thus act as an early warning system. These inflation expectations are crucial to the question of whether inflationary events will pass or continue.

When consumers and businesses adjust to long-term price increases and adjust their behavior accordingly, inflation becomes entrenched. These expectations are significantly influenced by the media. The “Dortmund Center for data-based Media Analysis” (DoCMA) at the Technical University of Dortmund has therefore developed the I-Index and published it for the first time in March 2022.

The methodology of the I-Index

It is based on the analysis of around three million newspaper articles. In addition to searching for the term “inflation,” algorithms filter for related terms, making associations and forming categories that can inform inflation views and influence expectations.

In fact, according to a Bundesbank survey, inflation expectations have continued to rise. Private households are therefore expecting inflation of eight percent over the next twelve months. In January they had still expected 4.5 percent. The expected value for the next four years is five percent, one percentage point higher than at the beginning of the year.

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However, it is interesting to note that expectations have not risen as quickly since April. There can be two reasons for this: Either the attempts at improvement by monetary policy are working and the economic weakness is being linked to hopes of falling prices.

Or the households do not keep themselves constantly informed about the current economic situation, but sometimes more, sometimes less.

A look at the details of the I-Index shows that the second reason could be decisive at the moment. The researchers at the TU Dortmund state in their latest analysis: “The presentation of the media content in the I index indicates a longer phase of inflation.” Germany could face a “galloping inflation”.

More: Bundesbank President defends ECB decisions

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